Glossary

R

Rate of Return

Earnings from an investment, stated as a percentage of the amount invested; usually calculated on an annual basis.

Rational Expectations

Expectations about the future rate of inflation or other economic events that people form using all available information, including predictions about the effect of present and future policy actions by the government.

Rational Ignorance

A decision not to obtain information about political issues or candidates because the costs of doing so outweigh the benefits.

Real Estate

Property such as land, houses, and office buildings.

Real Gross Domestic Product (GDP)

GDP measured in dollars of constant purchasing power. The measure is obtained by adjusting nominal GDP (GDP
measured in current prices) by an appropriate price
index, usually the implicit price deflator. Often
used as a measure of economic activity.

Real Interest Rates

The nominal (posted) interest rate minus the rate of inflation.

Real vs. Nominal

Two ways of expressing monetary values. Nominal monetary values are measured in current prices; real monetary values are measured in constant prices, that is, in prices of a given or base period. Real monetary values are obtained by adjusting nominal monetary values with an appropriate index of prices.

Real Wage

The wage rate adjusted for inflation; the purchasing power of wages, the volume of goods and services that money wages will buy.

Recession

An extended decline in national economic activity; often defined as a decline in real GDP for at least two consecutive quarters (i.e., six months). (See also Contraction.)

Redistribution of Income

The transfer of income (in cash or in kind) through government taxation, spending and assistance programs targeted at particular income groups, and programs designed to provide training to workers or to encourage private investments in education or other kinds of human capital. The goal is to transfer money from higher-income groups to lower-income groups.

Regressive Tax

A tax that takes a larger percentage of income from people in lower-income groups than from higher-income ones. Sales taxes and excise taxes are examples.

Regulation

Economic regulation is the prescription of price and output for a specific industry, often a natural monopoly. Social regulation is the prescription of health, safety, performance, environmental, output and job standards across several industries.

Relative Price

The price of one good in relation to the price of another good; a measure of opportunity costs and therefore the price that affects economic decision making.

Rent to Own

An arrangement whereby consumers rent something (often
furniture), making regular rental payments, and become
owners of the rented object(s) after a specified period of time--sometimes automatically and sometimes with an additional payment. A legal business but very costly to consumers. As an adjective: Ralph got his furniture at a rent-to-own store.

Required Reserves

The minimum amount of cash reserves (a percentage of the deposits) in dollars that a bank is required by law to keep on hand or with the Federal Reserve.

Reserve Requirements

The fraction of banks' deposits that they are required by law to keep on hand or with the Federal Reserve.

Resources

Natural resources, human resources, capital resources, and entrepreneurship used to make goods and services.

Earnings from an investment, usually expressed as an annual percentage.

Revenue

The money a business receives from customers who buy its goods and services. Not to be confused with profit.

Risk

The chance of losing money.

Risk and Return

The market value of all goods and services produced in a nation in a calendar year. (Compare Gross domestic product, real.)

Risk of Financial Loss

The chance that the value of an investment (the principal) will decrease.

Risk/Reward Ratio

As applied to investments: the greater the risk, the greater the potential reward. For example: passbook savings accounts offer depositors very low risk but also low rates of interest; growth stocks are much riskier, but they offer a potential for big gains.

Role of Government

Regarding financial markets, the government’s role is to protect the integrity of markets by enforcing property rights and correcting market failures.

Roles of Government

A process of examining the advantages (benefits) and
disadvantages (costs) of each available alternative in arriving at a decision.

Rule of 72

A mathematical rule for determining the number of years it will take for an investment to double in value. The number of years is determined by dividing 72 by the annual rate of return. Thus, an investment expected to earn interest at a rate 8 percent will double an investor’s funds in 72/8, or nine years. Dividing 72 by the number of years in which an investor
wishes to double his or her return will yield the necessary rate.